Banks help push European shares higher

A surge in the banking sector has helped lift European markets, as investors once again shrugged off the Italian referendum result and the resignation of prime minister Matteo Renzi. Hopes that the country’s parliament might pass a budget on Wednesday provided some support, as did the continuing optimism that investors might rescue struggling Monte dei Paschi. If that does not happen, there was growing talk that a state bailout could take place this weekend.

The idea that the bank would be recapitalised one way or another pushed the Italian banking index 9% higher, its best one day performance since 8 July. Monte dei Paschi itself added 1%, while Unicredit climbed 13%.

Elsewhere Deutsche Bank jumped 8% while in the UK, Royal Bank of Scotland rose nearly 6% and Barclays 4.5%.

The final scores showed:

The FTSE 100 finished up 33.01 points or 0.49% at 6779.84

Germany’s Dax rose 0.85% to 10,775.32

France’s Cac climbed 1.26% to 4631.94

Italy’s FTSE MIB jumped 4.15% to 17,757.80

Spain’s Ibex ended 2.64% higher at 8893.3

In Greece, the Athens market added 0.36% to 622.52

On Wall Street, the Dow Jones Industrial Average is currently up 19 points or 0.1%.

On that note, it’s time to close for the evening. Thanks for all your comments, and we’ll be back tomorrow.

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Ratings agency Fitch has moved its outlook on Italian banks from stable to negative for 2017, in the wake of the referendum vote and worries about their ability to recapitalise. Fitch said:

The Negative Outlook for the Italian banking sector reflects its increased vulnerability to shocks following the asset-quality deterioration in legacy portfolios... A step-up in pressure from authorities and market participants on the sector to reduce the very high levels of impaired loans has increased urgency and risks for Italian banks.

Profitability in the sector is frail. Disposals of non-performing loan portfolios could lead to losses that require additional capital. These are some of the factors driving the 2017 Outlook to Negative from Stable. Problems for a small number of distressed banks raising capital have added to these pressures

The “No” vote at the constitutional referendum has further heightened political uncertainty and possibly reduced the capacity to implement economic reforms. The risks from political instability were one factor that contributed to our revision of the Outlook on Italy’s ‘BBB+’ sovereign rating to Negative in October.

The referendum result could also damage the recapitalisation plans of some Italian banks, most notably Banca Monte dei Paschi di Siena and UniCredit, and have negative implications for the broader banking sector, whose attractiveness with investors has already reduced significantly during 2016. The sector’s ability to access the institutional markets for funding and capital, which has become more difficult and expensive this year, could deteriorate further...

Significant disposals that materially improve asset quality could be positive for ratings. However, the disposals are likely to result in further provisioning and possibly more capital shortfalls for the banks involved. Portfolio sales could also result in risk-weighted assets rising for the remaining loans if the sales affect loss-given-default estimates at banks using internal rating models.

Capitalisation will remain under pressure in 2017 with a weak earnings outlook limiting banks’ ability to build capital. Low interest rates, tepid economic growth and fierce competition for healthy borrowers are challenges for earnings. Profitability could also be dented by restructuring costs as banks focus on cost-cutting.

We also believe regulators could require higher capital buffers from Italian banks to compensate for the risk in their large non-performing loan portfolios and for the large portion of Italian sovereign debt held. This could result in additional capital requirements at some banks.

The Italian referendum proved a non-event for markets, including emerging markets, because it had effectively been priced in, and at the same time suggested the European Central Bank might well extend its quantitative easing programme this week. So says David Rees of Capital Economics. But he adds:

Nonetheless, the political situation in Italy, and indeed the rise of populism in Europe more generally, is something to keep an eye on in the months ahead. Italy’s economy and banking sector are weak, and if the Five Star Movement’s momentum continues to build, it may not be long before an exit from the euro becomes a more realistic concern for investors....Similar fears have rocked emerging market equities in the past, when the Greek debt crisis first came to the fore and Spanish and Italian bonds came under fire in 2012.

Italy’s banking sector continues to recover, helped by talk that the country’s parliament might approve its budget on Wednesday, and there could be a state bailout of troubled Monte dei Paschi this weekend.

The country’s banking index is currently up more than 7%, its best daily performance since the middle of July.

The overall European banking index is up 3%, hitting its highest level since the middle of January.

The first evidence has emerged that the era of record-low fixed-rate mortgages may be coming to an end after HSBC withdrew its “cheapest-ever” deal and increased rates on other products.

HSBC had been offering a mortgage that allowed customers to lock in for two years at a rate of 0.99%, but this deal has been pulled with immediate effect. The bank’s new mortgage offers are coming in at up to 0.5% higher.

David Hollingworth at broker London & Country Mortgages said: “The bottom of the market may have been hit. This [announcement] and the broader changes from HSBC, which has been very aggressively priced in the fixed-rate market, could spell the end of the sub-1% fixed rate, but also signals a potential turning point for fixed mortgage rates.”

HSBC raises mortgage rates and pulls 'cheapest-ever' fix

Donald Trump may be casting doubt on Boeing’s Air Force One order, but elsewhere US manufacturers are doing well.

New orders for US factory goods rose 2.7% in October, the biggest increase for nearly a year and a half and just above expectations of a 2.6% improvement. The September figure was revised upwards from a gain of 0.3% to 0.6%. The latest figures mark the fourth straight month of increases.

But there could be clouds ahead, given the strength of the dollar following Trump’s election victory. Paul Sirani, chief market analyst at Xtrade, said:

US factory orders surged... in October, providing manufacturers with plenty of optimism in what has been a turbulent year.

Uncertainty surrounds the sector, though, amid renewed strength of the dollar and the incoming president’s trade policy, particularly his approach to China.

Donald Trump’s promised fiscal stimulus and the increasing likelihood of raising interest rates has fuelled a greenback rally, and that could starve off exports and hit US factories hard in the new year.

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Our correspondent Helena Smith reports from Athens

For the first time since economic crisis engulfed Greece just over seven years ago, a sitting government in Athens has felt fit to describe a decision taken in Brussels as a “national success.”

The positive spin and brave faces that have greeted the three bailouts rolled out for Greece, so far, have today been superseded by a genuine sense of relief at the announcement of short-term measures to lighten the country’s mountainous debt load.

Many in Syriza, the governing left-wing party, said the move by euro zone partners to shave €45bn euros off the pile – the equivalent of 22 percent of GDP – by extending the repayment period and adjusting interest rates - exceeded “every expectation.”

Addressing reporters today the government spokesman Dimitris Tzanakopoulos described the decision both as a “significant achievement” and “decisive step for the stabilisation of the Greek economy and complete restoration of confidence.”

But as Greece’s political opposition was quick to point out the victory was bittersweet.

This might be the first time that the nation’s unmanageable debt burden has been addressed head-on – and as such can only be seen as rich reward for prime minister Alexis Tsipras - but it comes against a backdrop of calls for Athens to adopt yet more austerity once its current bailout programme expires in mid-2018.

Amid signs of a looming showdown with the International Monetary Fund, which says further belt-tightening is the only way to plug the looming fiscal gap and thus ensure its own participation in Greece’s third bailout to date, the spokesman called the demands “irrational.”

Athens, he insisted, would neither accept the German proposal for Greece to achieve a primary surplus of 3.5 % through 2028 nor the IMF’s demands for extra measures in 2019 and 2020. Both are expected to dominate talks when auditors representing creditor institutions return to continue negotiating a second review of policy measures set as the price of bailout funds.

It’s certainly not as systemically important as other banks, for example Italy’s Unicredit, but Monte dei Paschi’s main problem is that it has become symbolic of Italy’s rotten banking sector that now relies on foreign capital for life support.

If the Qatari’s decide against investing in it then it gives a terrible signal to the world about the ‘investability’ of Europe’s banks. Interestingly, in Europe it is not the systemically important banks that are the biggest risk to the financial sector, but the glut of mid-size banks that hold billions in bad debts that could endanger the health of the bigger banks in Europe, if contagion is to spread.

Business confidence in Italy is likely to be hurt by the political uncertainty created by Sunday’s referendum result, and the struggles in the banking sector.

Ana Boata, economist at trade insurance firm Euler Hermes, believes 0.3 percentage points could be knocked off growth next year, taking the annual rate down from 0.9% to 0.6%.

She predicts that foreign investment will be hit, and Italian firms could suffer high financing costs if their banks remain weak:

While there is no need to panic, the resounding ‘No’ result and political turmoil that has followed could cause a mild confidence crisis in 2017. Even without any spill over to banks or the bond market, we expect -0.3pp of Italian GDP could be shaven off, leaving the economy with the prospect of a mere 0.6% growth next year.

“It will be Italian companies that bear the brunt of a confidence shock, albeit a mild one, which are already contending with some of the worst cash flow conditions in the world – businesses are waiting on average for 88 days for payment for goods and services. We are likely to see divestment from abroad and tougher financing conditions mean that inward investment levels will stay flat, compared to 2% growth we previously predicted for 2017, and hamper the economy’s chances of recovery.”

One of the biggest worries surrounding the referendum was the impact it could have upon the nation’s banking system, with the likes of Unicredit and Monte dei Paschi in the midst of a recapitalisation and bank rescue plan.

Plans to raise substantial funds at Monte dei Paschi have hit the buffers after the ‘No’ vote and while a likely government bailout may not be the ideal otucome for the bank, it will mitigate the risk of a collapse and contagion in the region, hence the widespread gains across the financial sector today.